Underestimating our Financial Irrationality & How it Will Cost Us

"People
are always blaming their circumstances for what they are. I don't believe in
circumstances. The people who get on in this world are the people who get up
and look for the circumstances they want, and, if they can't find them, make
them."
-- George Bernard Shaw

As if it wasn't
bad enough that the US federal government extorts its citizens for more than $2
trillion per year in taxes and the Federal Reserve devalues the US dollar by
nearly 10% per year... but at the same time trillions more is wasted via
regulation.

Did you know that there is more than $28,000
of debt for every man, woman and child on the entire planet? And since
close to 3 billion of those people survive on less than 2 dollars a day, your
share of that debt is going to be much larger than that. If we took everything that the global economy produced this year
and everything that the global economy produced next year
and used it to pay all of this debt, it still would not be enough.
According to a recent report put out by the McKinsey Global Institute entitled
“Debt and (not much)
deleveraging“, the total
amount of debt on our planet has grown from 142 trillion dollars at the end of
2007 to 199 trillion dollars today. This is the largest mountain of debt
in the history of the world, and those numbers mean that we are in substantially worse condition than we were just prior to the last
financial crisis.

Factory orders have declined year over year for six months in a row.
That is something that has never
happened outside of a time of recession. We have also
seen new orders for consumer goods fall dramatically. In fact, the only
time we have seen a more dramatic decline in that number was during the last
recession.

John
Williams of shadowstats.com has calculated that if the government was actually using honest
numbers that they would show that we have continually been in a recession since
2005!

When it comes to debt, a lot of fingers get
pointed at the United States, and rightly so. Just prior to the last
recession, the U.S. national debt was sitting at about 9 trillion dollars. Today, it has crossed the 18 trillion dollar mark. But of course the U.S. is not the
only one that is guilty. In fact, the McKinsey Global Institute says that
debt levels have grown in all major economies since 2007. The following
is an excerpt from the report…

“In 2014, only 13 percent of
Americans approved of the job Congress was doing,” Marc Goodman wrote in Future Crimes,“a
slight improvement from the all-time low of 9 percent in Nov. 2013.”

Seven years after the bursting of a global
credit bubble resulted in the worst financial crisis since the Great
Depression, debt continues to grow. In fact, rather than reducing indebtedness,
or deleveraging, all
major economies today have higher levels of borrowing relative to GDP than they
did in 2007. Global
debt in these years has grown by $57 trillion, raising the ratio of debt to GDP
by 17 percentage points (Exhibit 1). That poses new risks to financial
stability and may undermine global economic growth.

What is surprising is that debt has actually
grown the most in China. If you can believe it, total Chinese debt has
grown from 7 trillion dollars in 2007 to 28 trillion dollars today.
Needless to say, that is absolutely insane…

China’s debt has quadrupled
since 2007. Fueled by
real estate and shadow banking, China’s total debt has nearly quadrupled, rising to $28 trillion by mid-2014, from $7
trillion in 2007. At 282
percent of GDP, China’s debt as a share of GDP, while manageable, is larger
than that of the United States or Germany. Three developments are potentially
worrisome: half of all loans are linked, directly or indirectly, to China’s
overheated real-estate market; unregulated shadow banking accounts for nearly
half of new lending; and the debt of many local governments is probably
unsustainable. However, MGI calculates that China’s government has the capacity
to bail out the financial sector should a property-related debt crisis develop.
The challenge will be to contain future debt increases and reduce the risks of
such a crisis, without putting the brakes on economic growth.

In Case You
Didn’t Already Know…

China is taking over as the world’s dominant
merchant and buyer.

In doing so, it is redrawing trade routes that it sees as most beneficial to
its needs. In that, America is a decided loser.

That’s not saying the West — i.e., America — is dead. We will always play a
role in global trade. But American politicians and economists are
underestimating the tidal shift that’s now rolling over the world.

The Silk Road 2.0 is just one (monumentally large) example of it. China has
also begun the Asia Infrastructure Investment
Bank that has pulled in a host of
U.S. allies as founding members. And it’s a founding member of a new version of
the International Monetary Fund that will serve emerging nations absent the
often-unwanted influence exerted by America. (It’s all a well-constructed
effort by China to push back against the U.S. in Asia).

What all of this means is that our long-term
global economic problems have gotten much, much worse. This short-lived
period of relative stability that we have been enjoying has been fueled by
unprecedented amounts of debt and voracious money printing. Anyone with
half a brain should be able to see that this is a giant financial bubble, and
in the end it is going to unwind very, very painfully. The following
comes from a Canadian news source…

At the beginning of 2008, government
accounted for a smaller portion of the debt pie than corporate, household or
financial debt. It now
exceeds each of those other categories.

“The current situation is much worse than in 2000 or 2007, and with
interest rates near or at zero, the central banks have already used up their
ammunition. Plus, the total indebtedness, especially the indebtedness of
governments, is much higher than ever before,” said Claus Vogt, a Berlin-based analyst
and co-author of a 2011 book titled The Global Debt Trap.

“Every speculative bubble rests on some kind
of a fairy tale, a story the bubble participants believe in and use as
rationalization to buy extremely overvalued stocks or bonds or real estate,”
Mr. Vogt argued. “And now it is the faith in the central-planning capabilities
of global central bankers. When the
loss of confidence in the Fed, the ECB etc. begins, the stampede out of stocks
and bonds will start. I think we are very close to this pivotal moment in
financial history.”

But for the moment, the ridiculous stock
market bubble continues.

Internet companies that didn’t even exist a
decade ago are now supposedly worth billions upon billions of dollars even
though some of them don’t make any money at all. There is even a name for
this phenomenon. Internet companies that have gigantic valuations without
gigantic revenue streams are being called “unicorns”…

A dizzying mix of bold ideas and lavish
investments has catapulted dozens of privately held start-ups to unicorn
status, defined as having market valuations of at least $1 billion often
without soaring revenues to match. Social-sharing site Pinterest has soared to
$11 billion. Ride-hailing company Uber is now worth a staggering $50 billion.

How long can
the party last?

And these days, Wall Street even rewards
companies that lose huge amounts of money quarter after quarter. For
example, just check out what happened when JC Penney announced that it only lost 167 million
dollars during the first quarter of
2015…

Yippee!!! JC Penney ONLY lost $167 million in
the first quarter. The Wall Street shysters are ecstatic because they BEAT
expectations. Buy Buy Buy.

This loss now brings JC Penney’s cumulative
loss since 2011 to, drum roll please, $3.5 BILLION. They haven’t had a
profitable quarter in over four years. But, they are always on the verge of
that turnaround just over the horizon.

Wall Street has told you to buy this stock
from $42 in 2012 to it’s current pitiful level of $9. They tout the wonderful
3.4% increase in comparable sales. They fail to mention that first quarter 2016
sales are only 30% below first quarter sales in 2011.

They fail to mention that JC Penney burned
through another $274 million of cash in the first quarter. Their equity has
dropped by $1 billion in the last year, while their long term debt has gone up
by $500 million.

This is how
irrational Wall Street has become…

The
Poor Man has been sounding the alarm about this for nearly a decade.

Bloggers, such as myself, have been predicting a market
collapse for years. Some of these fears may be premature. But when the top
economist for a too-big-to-fail bank says the same thing, it’s time to take
notice. HSBC’s Stephen King says markets are like the Titanic without enough
lifeboats. Click
here for more.